Three Important Texas Supreme Court Opinions Issued

The Texas Supreme Court issued three opinions last week of interest to Texas land and mineral owners: one dealing with the duties of holders of executive rights, one limiting the condemnation powers of pipelines, and one addressing whether injection well operators can be held liable for trespass if the injected substances migrate onto adjacent lands.

Leslie v. Veteran’s Land Board – The duty of the executive rights holder

The Supreme Court again considered what duty the holder of the
right to lease (“executive right”) minerals owned by another has to the
non-executive mineral interest owner. The court significantly weakened
its prior decision in In re: Bass, and increased the duties of
the holder of the executive right. The right to lease is often separated from the mineral interest. For example, if I sell a tract to a
developer, but want to keep part of the mineral interest, the developer
may object, worried that I, as a mineral interest owner, might lease my
interest and allow a company to drill wells on the property he intends
to develop for a residential subdivision. A common solution to this
problem is for me to retain a part of the mineral interest (or a part of the royalty interest) but convey to the developer the exclusive right
to lease the minerals. The developer is then protected, because no
mineral development can take place without his consent. Whenever the
right to lease is separated from the mineral or royalty interest, the
holder of the leasing right is called the holder of the “executive
right,” and the other mineral or royalty owner without any leasing right is called the owner of the “non-executive” interest.

In the Leslie case, a developer named Bluegreen
purchased 4,100 acres of land in southwest Tarrant County, outside of
Fort Worth, to develop a large residential subdivision, Mountain Lakes,
of over 1700 lots. Bluegreen acquired some of the minerals in the 4,100
acres and all of the executive rights to the minerals. Bluegreen then
imposed restrictive covenants on its development to govern what kinds of homes could be built, what uses of the property could be made, etc. One of those restrictive covenants prohibited “commercial oil drilling, oil development operations, oil refining, quarrying or mining operation.”
Later, development of the Barnett Shale formation in Tarrant County
occurred, and companies sought to lease the 4,100 acres to drill Barnett wells, but found that the restrictive covenant prohibited development.
Evidence in the case showed that “Mountain Lakes is sitting on $610
million worth of minerals that, in large part, cannot be reached from
outside the subdivision.” So the non-executive mineral owners sued,
seeking to have the restrictive covenants declared void. Their theory
was that, by imposing the restrictive covenant prohibiting mineral
development, Bluegreen had breached its duty as the holder of the
executive rights. The trial court declared the restrictive covenant
void, but the Eastland Court of Appeals upheld it. The Supreme Court
agreed with the trial court, holding that “Bluegreen breached its duty
to [the non-executive mineral owners] by filing the restrictive
covenants. The remedy, we think, should be the … cancellation of the
restrictive covenants.”

The interesting part of the Supreme Court’s opinion is its discussion of its earlier opinion in In re: Bass, decided in 2003. In Bass, the Bass family of Fort Worth owned 20,000 acres, including the minerals, but subject to an outstanding 1/12 royalty interest owned by the McGills and others. The McGills sued Bass, alleging that Bass had breached his duty as holder of the executive rights by refusing to lease the minerals under the ranch. The court held that Bass had breached no duty to the McGills – that failing to exercise one’s executive rights is not a breach of the the executive rights-holder’s duty to the non-executive owner. Bluegreen relied on the court’s decision in Bass to argue that it likewise had not breached its duty to the non-executive mineral owners by preventing any leasing of the subdivision lots. The Supreme Court disagreed:

[W]e do not agree with Bluegreen and the land owners that Bass can be read to shield the executive from liability for all inaction. It may be that an executive cannot be liable to the non-executive for failing to lease minerals when never requested to do so, but an executive’s refusal to lease must be examined more carefully. If the refusal is arbitrary or motivated by self-interest to the non-executive’s detriment, the executive may have breached his duty. While there was an allegation of self-interest in Bass, we concluded that it was not sufficiently supported by the record to warrant compelling discovery of privileged information

I would argue that the Supreme Court has in effect overruled its earlier decision, without expressly saying so. The holder of executive rights does have a duty to lease under some circumstances. If its refusal to lease is “arbitrary or motivated by self-interest to the non-executive’s detriment, the executive may have breached his duty.”

Pipeline companies in Texas have the power of eminent domain – that is, they have the right to take easements over private property to lay and operate their pipelines. They are granted that authority by the Texas Legislature because the legislature has concluded that pipelines serve a public purpose – transporting and delivering oil, natural gas and other products for public use.

Under the Texas Constitution, private property cannot be taken except for a “public use.” If the Legislature grants a private entity such as a pipeline company the power to take property by condemning easements, such taking must be for a “public use.”

Texas statutes governing pipelines provide that, before a company can exercise the power of eminent domain, they must register with the Texas Railroad Commission and obtain a permit, and they must agree to be a “common carrier” subject to the Railroad Commission’s authority. A “common carrier” is a pipeline that transports oil or gas owned by others for a fee. Pipelines have long considered that, if they follow these procedures, then they can exercise the power of eminent domain and condemn pipeline easements over private land.

In Texas Rice Land Partners, Denbury obtained a permit from the Railroad Commission to construct and operate a pipeline to carry carbon dioxide from the Texas-Louisiana border to the Hastings Field in Brazoria and Galveston Counties, in East Texas. The purpose of the pipeline was to transport gas from a naturally occurring reserve in Mississippi known as Jackson Dome, owned by Denbury, to be used in the Hastings Field for tertiary recovery operations in wells in that field, also owned by Denbury. Denbury followed the procedure to designate itself as a common carrier and affirmed that it would transport gas for others for a fee and would be a common carrier subject to the regulation of the Railroad Commission. (The entity obtaining the permit was a subsidiary of Denbury which would own and operate the line; the CO2 would be owned by a different Denbury affiliate, which would pay a fee to its affiliated pipeline company for the transportation of the CO2.) It also filled a tariff, which is a schedule showing the fees it would charge for transporting CO2.

Texas Rice Land Partners owns land across which Denbury wanted to construct its pipeline. When Denbury sought an easement across its property, Texas Rice Land Partners refused, and it challenged the authority of Denbury to condemn the line, asserting that the line was not being built for a “public purpose.” The trial court and the court of appeals both held that Denbury was a common carrier and had condemnation authority. The Supreme Court reversed, holding that there was a question of fact whether the proposed pipeline was actually intended to be used for a public purpose.

The court first held that a pipeline does not acquire condemnation authority merely by obtaining a permit from the Railroad Commission and subjecting itself to that agency’s jurisdiction as a common carrier. The Commission makes no determination whether the intended use of the pipeline is in fact “public.” The court then held that in order for a pipeline to serve a public purpose, “a reasonable probability must exist, at or before the time common-carrier status is challenged, that the pipeline will serve the public by transporting gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier.” Once a landowner challenges its status as a common carrier, “the burden falls upon the pipeline company to establish its common-carrier bona fides if it wishes to exercise the power of eminent domain.” (The court also held that one affiliated company transporting gas solely for the benefit of another affiliate is not a public use of the pipeline.”) The court said that the question of whether the pipeline is dedicated to a “public use” is ultimately a judicial question. The court held that the summary judgment evidence submitted by Denbury that it might in the future transport gas owned by others was not sufficient to show that the pipeline would be used for a public purpose. The court remanded the case to the trial court for a trial of whether Denbury’s pipeline would serve the public by transporting gas for customers.

A hypothetical used by the court in its opinion is revealing:

Suppose an oil company has a well on one property and a refinery on another. A farmer’s property lies between the oil company’s two properties. The oil company wishes to build a pipeline for the exclusive purpose of transporting its production from its well to its refinery. Only about 50 feet of the proposed pipeline will traverse the farmer’s property. The farmer refuses to allow construction of the pipeline across his property. The oil company knows that no party other than itself will ever desire to use the pipeline. In these circumstances, the application for a common-carrier permit is essentially a ruse to obtain eminent-domain power. The oil company should not be able to seize power over the farmer’s property simply by applying for a crude oil pipeline permit with the Commission, agreeing to subject itself to the jurisdiction of the Commission and all requirements of Chapter 111, and offering the use of the pipeline to non-existent takers.

FPL owns farmland in Liberty County and has engaged in extensive litigation since 1996 over the operation by EPS of an injection well on an adjacent tract. In the most recent case, FPL sued for trespass and negligence, alleging that injected substances had migrated under FPL’s tract causing damage. FPL lost in the trial court and appealed. The Beaumont Court of Appeals affirmed, holding that because EPS held a valid permit for its well, “no trespass occurs when fluids that were injected at deep levels are then alleged to have later migrated at those deep levels into the deep subsurface of nearby tracts.” The Texas Supreme Court reversed and remanded the case to the court of appeals, holding that Texas laws governing injection well permits “do not shield permit holders from civil tort liability that may result from actions governed by the permit.”

This is another case dealing with subsurface trespass caused by oil and gas operations. The Supreme Court has recently grappled with this issue in Coastal Oil & Gas Corp. v. Garza Energy Trust, decided in 2008, where the court held that an adjacent landowner has no cause of action for trespass if fluids enter his subsurface from fracturing operations in a well on adjacent lands. The court in FPL v. EPS distinguished its ruling in Garza: it said that Garza was founded in part on the rule of capture – the owner of the offending wells in Garza had the right to produce oil and gas from his well, even if drained from adjacent lands by the fracturing operation. The rule of capture has no application to operation of injection wells: “Mineral owners can protect their interests from drainage through means such as pooling or drilling their own wells. .. That is not necessarily the case when a landowner is trying to protect his or her subsurface from migrating wastewater.” But the court was careful to say that was not deciding that owners of injection wells could be guilty of trespass if their injected fluids migrated onto other lands. “We do not decide today whether subsurface wastewater migration can constitute a trespass, or whether it did so in this case.” So, we must wait until another day to find out whether injection wells can cause trespass damages.

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